The Secrets of an Effective Franchise Disclosure Document ...

At least for the last three decades, business franchising has been a widely adopted business model. Franchising offers an advantage to the less-experienced entrepreneur. What he only has to do is to implement the operational scheme of the business in accordance to the standards of the franchisor. If you have established rapport with a franchise representative, be mindful that it is important to understand well what is in writing, and here we are referring to the franchise disclosure document (FDD).

A franchise disclosure document is a legal document. Well, the contents may sound too boring to read, but as a franchise buyer, it is extremely important that you understand what?s in this document. So what must a franchise disclosure agreement contain? Culled from the article written by The Entrepreneur Option titled ?What?s Important in a Franchise Disclosure Document?? here are the items that the FDD should have.

Important Contents of a Franchise Disclosure Document:

1. Information on the senior managers of the company

Franchisees need to know whether or not there has been any ownership change, if there has been a history of filing for bankruptcy, as well as other relevant information such as experience or background of the owner in the industry.

?This is the kind of information that will be included in the ownership, in items number one, two, and four? advised by The Entrepreneur Option.

In addition, it is even important to check for litigation history.

??a single lawsuit might not be a reason to worry. But some franchise companies have literally dozens of suits between them and the individual franchisees. If you see that kind of litigation history, ?you know you could be in for big trouble after joining that franchise.?

2. Franchise fees/costs

How much do you need to make an investment to start a franchise?

?The company will give you ranges for every start-up cost that franchisees typically experience:? rent and advertising and construction. They?ll tell you how much cash you should have on hand in order to cover your costs after you open.?

3. Franchise rules?

Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. If you own an automobile transmission repair franchise, you may not be able to perform other types of automotive work, like brake or electrical system repairs (Bureau of Consumer Protection).

Let us take McDonald?s as an example. The common knowledge is that all of their food products must be directly purchased from the franchiser. Thus, you need to take a look if the franchise consists of rules like this.

4. Protected territory

As a shared goal for business growth, the franchisor seeks to provide its franchisees the opportunity to develop as well as to sustain the enterprise. This is an important reason for rules on territory. So are there rules on territory?

?Some franchises give you a protected territory, while others do not. Neither of these is necessarily ?better???

5. Share of financial results

While this is only an optional part of the FDD, the permission for the franchisor to share financial results with existing franchisees is often looked into.

?Unfortunately, only about one-third of franchisors provide this. But don?t worry ? if yours does not, there is still a way to get this information.?

6. Number of franchises

The FDD should include information about how many franchises they have, including how many have opened and closed for the past two years. You should also see the phone numbers of the last franchisee. Why is this important?

?Because those franchisees are your best source of information on the business. You can pick up the phone and call as many of the existing franchisees as you like. Whatever you want to know about the business, you can ask them.

The existing franchisees will give you an inside look into exactly what it?s like to own this franchise. We find they usually give it to you straight ? warts and all. And after all, no one is in a better position to tell you what the business is really like than the people who are working in the business every day.?

The Federal Trade Commission (FTC) regulates all franchises in the United States, and an annual publication of a Franchise Disclosure Document (FDD) is required as one of the regulations.

?Every year the document must be updated with current information. The FTC dictates what information must be included in the FDD. The FTC actually writes the table of contents. They ensure that each franchise company provides the same kinds of information, usually called ?items.?

If you are planning to purchase a franchise in another country, it is best to check the regulatory body that oversees franchise businesses in that area. The information provided above may apply only to the U.S.

Tell us what you know about FDD. We would love to hear from you. Please share your opinions in the comments below.

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